FAS 157 Compliance Troubles: Can IRC 409A Offer Some Succor to Venture Capital Firms?

Ever since FASB Statement No. 157 (FAS 157, now codified as ASC 820) was introduced in 2006, publicforums have become veritable battlegrounds and sharply polarized the opinion on its utility.

While the defenders have been guarded with their opinions, the detractors have been denouncing it increasingly vehemently to the point of calling it “stupid,” and in some cases, “a significant contributing factor” for the recent financial meltdown.

Behind the rhetoric, however, it is fair to say that FAS 157 has been received with skepticism with some merit. Entities that need to comply with the FAS 157 norm, including venture capital firms, have been a worried lot. Not without reason, for the impact of induction of this Statement on VC firms has been enormous.

For instance:

• Complexity involved in being compliant with FAS 157 is perceived to be greater in comparison with the current methods of valuation.
• The increased complexity directly meant need for much greater efforts in terms of time, energy and money.
• The challenges posed by FAS 157 are comparatively stiffer for VC firms, as their investments are typically made in the innovative technology start-ups.
• FAS 157 prescribes quarterly reporting, as the VCs are required to report to their LPs every quarter.
• Moreover, the clarity on how to comply with the Statement was not adequate, due to the ambiguity in application of new concepts introduced.

To download this article published in Venture Capital Review, Issue 26, Fall 2010, please click here.